DP16049 Media Sentiment and Currency Reversals
|Author(s):||Ilias Filippou, Mark Taylor, Zigan Wang|
|Publication Date:||April 2021|
|Keyword(s):||currency reversals, currency risk premium, digital text, FX media news|
|JEL(s):||C38, C55, F31, G11, G41, Z13|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16049|
Analyzing 48 foreign exchange (FX) rates and 1.2 million FX-related news articles over a 35-year period, using digital textual analysis, we find that a currency reversal investment strategy that buys (sells) currencies with low (high) media sentiment offers strong positive and statistically significant returns and Sharpe ratios. The results are robust and the strategy adds value over other currency premia determinants such as carry and momentum. Analysts' forecasts systematically mispredict the reversal strategy. This is the first paper to show that price reversals based on media sentiment are a well-defined feature of the foreign exchange market.